Apportionment between Capital & Income in Trusts

Apportionment between Capital & Income in Trusts

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According to WS Gilbert in “The Gondoliers”, “Quiet, calm, deliberation disentangles every knot”.

One of the unsung heroes of the legal world, and one which does a good deal of disentangling in a quiet way, is the Law Commission. It has now published its report Number 315, on the somewhat esoteric, but vitally important subject of the Apportionment between Capital and Income in Trusts.

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This may seem a subject for those who wear anoraks during the day and need to get out more at night and have some kind of social life; but this is far from the case. The ability to be fair between beneficiaries is at the heart of equity and the requirement to pay tax is at the centre of the citizen’s contract with his state.

This is a very important Report. If, understandably, you do not have time to read it in full, then at the very least you should read the executive summary which will remind you of the issues involved and give you much food for thought.

The report deals with important issues such as the Sinclair v Lee issue namely the classification of corporate receipts and how the trust answer should tie in with the tax exempt nature of some de-mergers. In this context who could have thought that the case of Sinclair v Lee [1993] Ch 497 should have been decided any other way except that the arguments to get there to get to the “right” result were somewhat tortuous and not exactly in line with all previous authorities on the topic.

The Law Commission is not oblivious to the security that a life tenant has and faces up to the dilemma that what may appear fair in the big picture is somewhat more dangerous for the life tenant in the narrower picture.

Likewise, the issues relating to investment policy, especially the concept of the total return and how that fits in to the life tenant/remainderman structure of a trust is carefully addressed.

The old checklist of apportionments, equitable and statutory (and those with long memories will recall the delights(!) of Howe v Damouth etc calculations), will be consigned to history if the proposals are enacted. Another break with the past, but one that will avoid tedious explanations to clients who look at you with a glazed, bemused expression.

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